RBI Poised to Shift to Dovish Stance Amid Growth Worries

RBI's Next Move to Be Closely Watched Amid Geopolitical Uncertainty

The Reserve Bank of India's (RBI) recent policy decision to keep interest rates on hold has been widely expected, given the ongoing war and its attendant uncertainty around crude and currency. According to Prabhakar Kudva, Director and Principal Officer - Portfolio Management Services at Samvitti Capital, the RBI's thinking will become clearer by the next policy meeting, when the geopolitical picture and its pass-through to inflation should be considerably clearer.

From an earnings standpoint, Kudva anticipates a marginal impact on Q4FY26 and Q1FY27 due to higher crude prices in March and April, particularly for crude-sensitive sectors. However, he expects things to largely normalise by Q2. Despite the challenges, Kudva remains optimistic about the RBI's eventual pivot towards a more dovish stance to support growth, which has been showing signs of moderation.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

Given the improved valuations after the recent correction, Kudva advises investors to enter the markets in a staggered manner. He cautions against stretching the deployment out too long, as markets tend to bounce off the lows faster than expected.

The ongoing war appears to be moving towards closure, with a two-week ceasefire already announced and behind-the-scenes diplomatic efforts pushing towards a more durable resolution. Markets will price in the resolution well ahead of the actual event. The war's impact on earnings, the economy, and equity markets is expected to be minimal, with Q4FY26 and Q1FY27 seeing a marginal impact due to higher crude prices.

Indian retail investors have matured significantly over the last few cycles and have been playing the current situation well, buying corrections rather than panicking out of them. Kudva does not anticipate any meaningful slowdown in SIP flows, and the latest AMFI data also does not reflect any such trend.

The RBI's recent intervention to support the currency has been timely and decisive, and Kudva expects the central bank to continue stepping in only at the extremes. The government has done a tremendous job of insulating day-to-day business activity from external shocks, and Kudva expects the same playbook to be deployed if the situation warrants it.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

On the investment front, private banks and utilities appear attractive for investment at current levels, purely on a valuation basis. However, in private banks, one has to closely track the growth trajectory, which is clearly slowing. Stock selection within the space matters far more today than it did a few years ago.

The Strait of Hormuz situation is expected to be behind us reasonably soon, with too much at stake globally for it to remain a prolonged disruption. The world economy and markets should return to normalcy over the next few months, especially with the US heading into mid-term elections in November, which itself becomes a strong incentive for de-escalation.